Consumer Bankruptcy Stirs A New Fight

Tweet

The delicate relationship between creditors' legal rights and those of debtors has always been tense. But the Bankruptcy Reform Act of 1978 may have unbalanced that relationship too far in favor of debtors, say critics. A coalition of business groups is promoting new legislation, the Bankruptcy Improvements Act of 1982, which would purportedly roll back some of the privileges won by debtors four years ago.

The Bankruptcy Reform Act "made it possible for consumers to go into bankruptcy and retain most of their assets," says Herb Liebenson, president of the National Small Business Association in Washington, D.C. "In many cases, a small firm that extended credit to a customer receives only a few cents on the dollar after a settlement." Small retail and finance companies are especially vulnerable to consumer bankruptcies, he says.

"It's a killer for small business," adds Harold McClung, manager of McClung & Morgan department store in South Charleston, W. Va. "It's too easy for consumers to declare bankruptcy. Our credit department received 50 bankruptcy filings last year, triple [the number received] the year before. It makes it almost impossible to support credit sales."

Walter R. Kurth, president of the National Consumer Finance Association (NCFA), which is fighting for the new bill's passage, argues that the "liberalization" of exemption rules -- allowing debtors, for example, to keep about $10,000 in personal assets, and in some instances even more -- has caused individuals to file bankruptcies out of "convenience and not need." He cites a study conducted by Purdue University's Credit Research Center, which found that one out of three consumers filing for total discharge of debts under Chapter 7 of the bankruptcy code "has the capacity to repay debts in full or in substantial part, and without hardship." Consumer bankruptcies have doubled since implementation of the new law.

But Vern Countryman, Harvard University law professor and vice-chairman of the National Bankruptcy Conference, an organization of attorneys, professors, and judges that helped develop the 1978 law, contradicts those figures. The NCFA, he says, counted joint petitions -- filed by husband and wife -- as two separate filings. Counting them instead as single filings, he argues that nonbusiness bankruptcies increased only 10% in 1981 from 1980.

Economist Charlie Carter of the Federal Reserve Bank of Atlanta, however, reported in the bank's Economic Review that bankruptcy cases rose 59% in fiscal 1980 and 43% in fiscal 1982, taking into account the joint filings. In his opinion, as many as three-fourths of the increase may be due to the liberalized law.

Supporters of the new bill argue that consumers capable of paying a reasonable portion of their debts out of anticipated future income should be forced into a repayment plan under Chapter 13 of the code. Currently that is a voluntary step. Under this procedure, the debtor negotiates a percentage of the obligations that he or she will pay to creditors over three years, after which the debts are discharged. The new bill would extend that period to five years.

Opponents of the bill, however, charge that a forced repayment plan represents an unwarranted departure from the philosophy of bankruptcy law over the past century. Says Lawrence P. King, a professor and bankruptcy specialist at New York University School of Law, "You cannot look five years down the road and predict whether a person will have the same job and income, whether variables such as illness, inflation, interest rates, housing, and food costs will remain constant." The Purdue study's figures, he charges, depend on keeping the debtor at the poverty level for five years.

Congressional hearings on the Bankruptcy Improvements Act were scheduled through the summer. According to a staff aide to the House Subcommittee on Monopolies and Commercial Law, committee members must evaluate the Purdue study before voting on the bill.